New Tool Helps Producers Assess Ethanol Plant Impact

The Ethanol Plant Analyzer allows farmers to run what-if scenarios on how the size and location of an ethanol plant might impact local corn prices. It was developed by Kevin McNew and Duane Griffith, Extension specialists in the Department of Agricultural Economics and Economics at Montana State. The Analyzer is located at: http://www.extensionecon.montana.edu/eplantanalyzer.

More than 70 ethanol plants currently operate in the U.S. and more are under construction. Many are farmer-owned. While ethanol supplies are currently abundant, the outlook is promising for increased demand. The renewable fuels standard provision of the energy bill now before Congress could potentially double the use of ethanol by 2012. Declining use of MTBE, ethanol’s major competitor, would also support ethanol demand growth.

“Increased demand for ethanol appears promising, but we already have capacity to produce more than 2 billion gallons per year,” says Walter Armbruster, President of Farm Foundation. “It is important that farmers and managers understand the risks of this business.”

“This project helps farmers, cooperative managers and policy makers better understand the economics of ethanol plants and the role of policies in the future development of the ethanol industry,” explains McNew.

The Analyzer builds on research McNew has done based on data from 316 grain markets around 12 ethanol plants that opened in 2001 and 2002. Here are some of the findings:

Ethanol plants increase local corn prices. The opening of all 12 ethanol plants in the study had a positive impact on corn prices. The price increase averaged 12¢ per bushel, and ranged from 5¢ per bushel to 19¢ per bushel.

Price impact is highest at the plant site. On average, some price impact was felt 30 to 100 miles from the 12 plant sites. Markets “downstream” (closer to a terminal market) from a plant tended to have higher prices and a smaller price impact from a new plant. More impact was seen in “upstream”markets that were a greater distance from terminal markets and generally had low prices.

Size and co-op structure matter. Plant size relative to local corn supplies had some effect on price impact. If local corn supplies were low, a large-capacity plant had a larger price impact. Grain procurement policies also had an impact. The two plants in the study that were owned by closed cooperatives, with all corn supplied by the farmer-owners, had the lowest impact on prices.

To use the Ethanol Plant Analyzer, select a potential location for the plant, as well as the plant size. The program will list in miles the area impacted by the plant, as well as the maximum impact in cents per bushel. The same information is also provided for specific locations around the proposed plant site. For example, a 45 million gallon per year plant located in northwestern Coffey County, Kan., would have a maximum price impact of 14.9¢ across an area of 122 miles. In Atchinson, Kan., 88 miles from the plant, the impact would be 14.9¢. In Bern, Kan., 108 miles from the plant, the impact would be 4.9¢. The Analyzer can map its findings -- locations with the highest impact are in green, with the least impact in red.

McNew and Griffith plan to expand the Analyzer to include transportation issues and further details on siting a new plant.